Caveat Emptor

A while ago, I commented on the sudden collapse of Portus Alternative Asset Management. Well, sure enough, the process of trying to wind up the affairs of this company has begun, and the receiver, KPMG, is finding all sorts of interesting muck.

If it smells wrong, it probably is. Portus didn't seem right from the get-go when I first heard about it - partly it was my advisor's inability to explain just how a hedge fund would operate in the first place, but when I reviewed the marketing literature there was an opaqueness to the company. Once you handed them your money, they pretty much could play with it as they saw fit.

Now we find that the Portus people were doing a number of nasty little things - unsigned deals with other companies, millions paid out to "consulting" firms owned by the principals of Portus, monies funnelled off to banks in the Carribean - and these are what is coming out as KPMG begins the process of figuring out what had been going on with Portus.

When KPMG is having trouble unravelling the network of interactions that make up Portus' books, I can only imagine how complex and twisted the mess must be. Hedge funds themselves are not trivial entities to begin with, and Portus' concept of building a "Fund of Hedge Funds" is fraught with complexity and risk. Hedge Funds themselves are complex and secretive organizations, often playing games with money that most individual investors would simply not comprehend. (I can only barely wrap my meagre mind around the notion of 'selling short') The problem I see with hedge funds is that the lack of transparency means that the fund management can do "whatever they please", and the individual investor has little or no visibility into it. So, if the fund manager decides that he'll get a better rate of return playing the tables in Las Vegas, he can do that, and you have no idea or say in the matter.

Even in an era where we think that there is enough regulatory structure in place to keep these funds "honest", there's always someone who will find a new way to sell snake oil. I guess that Portus is a reminder to the individual investor to keep their wits about them.